Ask Liz Weston

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Q&A

Q&A: Naming beneficiaries turns tricky

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Dear Liz: I have spent the majority of the last three decades abroad. Relationships fade away if there is little contact. Such is life. Most of the financial accounts that I have allow me to provide an organization as a beneficiary. But some institutions, like TreasuryDirect, require an actual person to be listed as a beneficiary. I have approached some acquaintances to ask if they would like to be my beneficiary, but as soon as I say I need their Social Security numbers, they think that I am trying to scam them. My bizarre question is: Whom can I leave my money to?

Answer: If you don’t name a beneficiary for your U.S. savings bonds, they become part of your estate when you die.

The proceeds can be distributed according to your will or living trust. This may require the court process known as probate, but whether that’s a big deal depends on where you live and the size of your probate estate. Many states have simplified probate that can make (relatively) short work of small estates.

If your savings bond holdings aren’t substantial and your other accounts have beneficiaries — which typically means they avoid probate — then this could be a reasonable approach.

Another option is to create a living trust and have the bonds reissued to the trust, said Burton Mitchell, an estate planning attorney in Los Angeles. Living trusts involve some costs to set up, but they avoid probate and they’re flexible.

“The reader can then modify the living trust whenever desired without re-titling the financial accounts,” Mitchell said.

Q&A: Junk fees for online payments

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Dear Liz: You recently answered a question about fees for paying bills online. I agree that the $12 fee mentioned is too high but I also know that any platform costs money to maintain. I work for a nonprofit that takes donations and our donors can choose to pay the fee. I doubt regular customers would agree to pay a corporation’s fees by choice.

Answer: The key word here is “choice.” Your donors are volunteering to chip in a little extra to help a charity. The letter writer was facing a $12 fee to securely pay an insurance bill online, when the alternative is to send a check through the (insecure) mail. Most companies have figured out that online payments are better for all concerned and are trying to encourage their use, rather than sticking consumers with junk fees for using this option.

Q&A: College expenses and 529 plans

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Dear Liz: You’ve been writing about what to do with leftover money in 529 college savings plans. Our grandchild went to a great state university with low tuition. To manage this ahead of time, we have carefully withdrawn some “excess” funds every year. This must be payable to the beneficiary student. The tax on non-qualified distributions applies only to earnings, not contributions, and will be negligible while the student is in college and has no or very low income. We paid for our CPA to prepare the tax filings. We have used this to pay for “non-eligible” living, travel and other expenses. I also recommend that parents start a college savings account in addition to a 529, because the strict definition of eligible costs leaves out a lot of expenses.

Answer: Previous columns have mentioned that withdrawals from 529 plans can be tax free when used to pay qualified expenses, which include tuition, fees, books and certain living costs, such as on-campus room and board or off-campus living expenditures up to the college’s “cost of attendance” limits, which are listed on its site.

Other common expenses, such as transportation and health insurance, typically aren’t considered qualified. Withdrawals that aren’t qualified will incur not just taxes on the earnings portion of the withdrawal but also penalties. The federal penalty is 10%, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

Your approach could be a good way to use up excess 529 funds, as long as you’re reasonably sure your grandchild won’t need the money for graduate school and you’re not interested in other options, such as naming another family member as beneficiary or rolling up to $35,000, subject to annual contribution limits, into a Roth IRA for your grandchild. (The Roth rollover option is new this year and applies only to accounts that are at least 15 years old. In 2024, up to $7,000 can be transferred for someone under 50, assuming they have at least that much earned income.)

As you noted, it’s important to ensure the non-qualified withdrawals are paid to the student if the idea is to minimize the tax bite. Otherwise the taxes would be calculated based on the account owner’s tax rate.

“If the grandparents kept the excess earnings, it would be taxed to the grandparents plus a 10% penalty, so it would almost always be the case that it would be better to have the excess funds paid to and taxed to the beneficiary,” Luscombe said.

Q&A: Asset allocation requires pro advice

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Dear Liz: I need guidance on asset allocation in retirement. I will retire in June at 65. I’m in good health, so I am planning for 30 more years of life, understanding that it could easily be fewer and might be more. I have a robust government pension and a good chunk of retirement savings. Targeting a 4% withdrawal rate from retirement savings, my post-retirement income will be about the same as my current income, less current savings contributions. The pension will make up about 75% of that income and the savings, about 25%. I could live on the pension alone if it came down to it. At age 70, I’ll get a bump of about 15% of that total income when I start taking Social Security, after accounting for the windfall elimination provision.

My analysis is that I essentially have 75% of my retirement assets allocated to very safe investments, i.e., my pension and future Social Security. I think I should allocate my 401(k) and 457(b) more aggressively than the usual guidance calls for. I’m considering selecting a 2050 or 2055 target date fund.

Am I looking at this correctly?

Answer: You do need guidance, and it should come from a fee-only, fiduciary financial planner hired to provide you with individualized advice. This is, after all, the first and probably only time you’ll retire, while a good advisor has guided many people through this process. The advisor will know the questions to ask and the traps to avoid far better than any novice could.

The advisor may concur that you can take more risk with your investments, given your substantial amount of guaranteed income. A lot will depend on your risk tolerance, of course, but the planner will consider other factors, such as your family situation and your plans for covering long-term care costs.

If you don’t have long-term care insurance, for example, you may want to stockpile more cash or identify assets you could sell to pay for care. If you’re married and your pension would end or diminish at your death, you may want to take less risk with your investments so they can better support your survivor.

There’s no substitute for having another set of expert eyes looking at your plan. So many retirement decisions are irreversible, and you’ll want to get this right.

Q&A: How this heir can head off challenges to her mother’s estate

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Dear Liz: My mother and her second husband have been married for over 25 years. They are both in their 60s. I am her only child. Mother has created a will in which I am the sole beneficiary. She owns three properties, two of which are here in California and one is abroad. Do I have any reason to be concerned that my mother’s wishes would be challenged by her second husband or my father, who also lives in California, whom she divorced over 33 years ago?

Answer: Anyone can challenge an estate plan. That doesn’t mean they will be successful. A long-divorced spouse, for example, probably wouldn’t have much standing to dispute a will.

A current spouse, however, could overturn the bequests if the properties were purchased during the marriage because California is a community property state.

That means assets acquired during marriage are generally considered jointly owned. Even if the properties were acquired before the marriage, the current spouse could successfully challenge the will if he contributed to a property — by helping to pay the mortgage, for example.

The chances of a successful challenge are greater if your mother is trying to do her own estate planning, rather than seeking expert advice. The fact that she’s created a will, rather than a living trust — which avoids probate and which is typically advisable in California — is concerning. In addition, bequeathing property abroad can be complicated, to say the least.

Your mother would be smart to consult an experienced estate planning attorney who can assess her situation and offer recommendations on the best way to structure her estate plan. You can help her find someone by asking friends and financial professionals for recommendations. If she’s balking at the cost, offer to pay the bill if you can. You’ll probably avoid future hassles and costs, so it should be a sound investment.

Q&A: Social Security hit from capital gains

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Dear Liz: Due to capital gains on the sale of a property, my monthly Social Security check is impacted by IRMAA, the income-related monthly adjustment amount for Medicare. Therefore not only do I not receive the recent cost-of-living increase, but my benefit substantially decreased. My question is: After a year will my monthly benefit go back to my most recent benefit, or to the increased amount I would have received without the IRMAA deduction? If the former, it seems like I lose forever.

Answer: You don’t lose forever, fortunately.

You did receive the most recent inflation increase in your Social Security benefit, but it was more than offset by the increase in your Medicare premiums. Medicare premiums are based on your income two years previously, so this year’s IRMAA was based on your tax returns from 2022. If your income went back to normal last year, then the IRMAA surcharge you’re experiencing should disappear next year.